Buying a home has been a dream come true for some through outright purchase, yet some others could not achieve it even through a mortgage because some of the factors that affect how mortgage rates are determined did not favor them.
Every lender has a way of arriving at the interest rate given to borrowers, the interest rate usually varies because of the differences in the circumstances that surround each person.
These key factors that can affect how mortgage rates are determined are essential for the security of both the lender and borrower. It also helps to seal the deal of agreement.
What Is Mortgage Rate?
A mortgage is an amount that is borrowed for the acquisition or maintenance of any form of real estate. It is paid back in installments over an agreed period of time. The property involved is often used as the collateral to secure the loan.
The mortgage rate can be defined as the rate your lender charges you annually on the amount that is loaned to you.
For you to access mortgage loans, you will have to go through a tedious underwriting process before the final phase.
Factors That Affect Mortgage Rates
Individual mortgage rates are unique because it is determined by your financial strength, the type of home involved and some other key factors that can affect how mortgage rates are determined. Take a look at some listed below;
Here, your credit score is one of the factors that is used to predict your reliability of repaying back the loan. Your credit score is the first most essential factor that lenders look out for to determine your success in obtaining the loan and how much rate will be given.
If your credit score is high, you will be given a lower interest rate but if it is low, then you will receive a high-interest rate.
It is therefore important that if you intend to apply for a mortgage loan, ensure there are no errors in the information provided in your credit report.
Your initial deposit is also an important factor that affects how much rate will be given to you. A large down payment attracts a lower interest rate and vice versa. So if you want to obtain a mortgage loan, a down payment of not less than 20% of the total amount should be considered.
This is because lenders assume that by paying a good percentage of the value of the property then your stake will be more and this can give them confidence and assurance of full repayment over the repayment plan period.
The loan amount is the amount that will be required to make up the total cost of acquiring the home minus your initial payment.
This is the period of time that you will have to pay up the loan. A longer duration will attract a higher interest rate while a shorter term will attract a shorter interest rate.
How Does Mortgage Work?
The monthly payment made is split into four categories which includes
- The principal amount-this is the part of the value of the property that is paid
- Interest charged-the amount charged on the mortgage
- Insurance- this is the amount that you pay against any unforeseen hazards.
- Taxes-this amount is determined by the amount that is assessed yearly in your environment.
This implies that a portion of all these categories is paid monthly.
What Are The Types Of Mortgage?
Mortgages vary in form. While there are some with as low as five years repayment plans, others may have over 35 years repayment plans. Below is a list of some of the types of mortgages that are available.
The interest rate of this type of mortgage does not change throughout the entire lifespan of the loan. This means that notwithstanding the length of your plan in paying off mortgage, let’s say 30 years, the rate will not change.
Under this type of loan, you are expected to pay the loan accruing on the property every month while you pay for the value of the property at the end of the mortgage plan
Under this type of mortgage, no regular monthly repayment is required. Every month, interest is calculated on the outstanding and added to the monthly balance. Payments can be made at any time to reduce the loan.
This can also be referred to as variable rate mortgage where the rate is according to the financial index associated with the loan. Changes in the rate will also affect your monthly repayment. This adjustment is made on a periodic basis.
For instance, a 10-year repayment plan may be adjusted every 6months
Pros Of A Mortgage
A mortgage plan comes with a lot of benefits which includes but are not limited to;
Becoming A House Owner
The reason many people were unable to acquire the house of their choice is that despite all their efforts and sacrifice, they are unable to save enough that will help them achieve it.
With the mortgage plan, more individuals can become house owners while payments can be spread all over a long period.
Easy Repayment Plans
Since the repayment can be spread over a long period of time, individuals can own a home that they will keep paying for even for up to 40 years in the case of mortgage plans that permits as long as that.
Cons Of A Mortgage
Here are some of the disadvantages of mortgages.
Repayment Over A Long Period
This is one of the cons of a mortgage is the fact that an individual is indebted for a very long time as long as the entire amount is due yet to be paid.
Risk Of Repossession
Where an individual default in the agreement, notwithstanding the reasons, such stands a risk of losing the home despite the amount of money that has already been paid.
These fees are different from the interest rate. It at the end of the term makes you pay excessively beyond the actual value of the home.
Common Mortgage Terms
Some of the common mortgage terms include;
Annual Percentage Rate – this is the rate that you are charged on your loan annually along with other additional lender fees
Assets – this is defined as what belongs to you which has a monetary value
Balloon loan – this term is applicable to individuals that opt for the interest-only mortgage. This is because a huge some is often paid at the end of the mortgage term
Down Payment – this is the initial payment that is made for the acquisition of a property
Escrow – this is an account that allows you to split your insurance and taxes into twelve places where you pay a part monthly. It is kept by the lender.
Home inspection – this will help you to identify some of the problems that require attention in the home. It may be repairs or some other things depending on what the inspector finds out.
Real Estate Agent – this is the individual that helps to search for a home
Seller concessions-these are clauses included in your offer that specify that the seller is responsible for certain payments. Note that the seller can choose to accept or reject it.
Title – this is evidence or proof of ownership of a property.
Closing costs– these are settlement fees and costs that seal the loan. Examples include loan origination fees, pest inspection fees, and appraisal fees. It is often between 3%-6% of the total loan.
Deed – this document is issued once you fully pay up your debt. It is proof of ownership of the property in view,
Appraisal – an estimate of the value of your home
To acquire your dream house requires a lot of conscious sacrifice and effort. Having discussed different aspects of mortgage such as what mortgage is, the types of mortgage, pros and cons of mortgage, mortgage, and the key factors that can affect how mortgage rates are determined, you can make decisions that are best for you.